Why Retaining Customers Is More Important Than Attracting New Ones

Customer retention is the unsung hero of the successful business. Its flashier sister, customer acquisition, usually steals the spotlight, but retention is what ultimately builds the foundation of a company that is positioned for growth. After all, it’s much easier to fill a bucket than a sieve.

So Why Exactly Is Retention Important?

1. It’s More Cost Efficient

It’s always more cost effective to re-market to existing customers rather than attract, educate, and convert new ones. The fact that these customers have already demonstrated an interest in your offerings and are engaged with your brand gives you an advantage that you’d be mistaken not to capitalize on. The rule of thumb is that it is 5 times more expensive to acquire new customers than it is to retain existing ones.

2. It Improves Lifetime Value

At the end of the day, what really matters isn’t how much a customer pays you today, but what their entire lifetime value is. For example, a customer may pay me $1,000 today and then disappear, while another one pays me $200/month for 5 years. Which one do you think is more valuable to my company?

It’s important to spend time optimizing retention before you spend on conversion. Otherwise, you will invest in converting customers and then lose a good portion of them, meaning they will have low lifetime values. Don’t waste your (or your investors’) money winning new customers who will have a low lifetime value.

3. It Builds Your Brand

In addition to cost savings, retaining customers means there will be more customers who have been using your product for longer and are therefore deeply engaged with your brand.

Building brand loyalty among existing customers really means you’re building a fanbase. And fans will evangelize for you in a very organic way, which ultimately brings you new customers. Keep your customers happy and engaged, and you’ll both benefit.

How To Improve Retention

So now you’re convinced and ready to tackle that pesky churn. But as with most things in life, improving customer retention is much easier said than done.

I wish I could give you a single, golden rule to improve retention. But the truth is, it absolutely varies case by case. What I can tell you is that the only way to find out what you need to do is to first measure and analyze. Ninety percent of your work is identifying the problem. Once you know the issues, implementing the solution is relatively easy.

Measuring retention in the most basic way looks something like this:

In this retention report, we see that of all the customers who initially came to the website, 32.7% returned 1 week later, 23.8% returned 2 weeks later, and so on.

Now this is a good start, but frankly, it doesn’t tell you all that much. The problem with this report is that it doesn’t measure the retention of similar customer groups. That is, it doesn’t compare apples to apples.

It would be more insightful for me to look at a report that showed me for how long customers continue to use the product after they sign up.

This report will filter out all those people who visit the website and never sign up, enabling me to focus on understanding the retention of that segment of customers who actually tried the product. It also allows me to measure not just how long this segment continued to return, but for how long they actually continued to use the product, which is ultimately what I care about.

But wait, there’s more.

Where I will really start getting insight is when I look at my cohorts. Cohorts show you the retention for groups of customers who began using the product at the same time.

I can clearly see that the group of users who started using the product during the 31st week are churning at a faster rate than those who signed up before them. While previous weeks saw 30%-32% of customers returning 1 week later, the 31st week only shows about 20% of customers returning 1 week later. Perhaps I pushed a product update at that time. My guess is that the update wasn’t received well and caused customers to abandon the product.

Now I’ve finally found my problem and I’m ready to hypothesize the solution, test, and measure all over again.